Gold is viewed as the ultimate safe haven asset, but investors should be taking a closer look at silver instead.
According to research by bullion dealer Baird & Co silver is a ‘buy’ on valuation grounds when looking at the gold-silver ratio, which is simply the number of ounces of silver it takes to buy one once of gold. The ratio currently stands at 81, much higher than its long-term average of 48 over the past 226 years.
Baird & Co argues that at previous points in time, a price ratio close to 80 has preceded a significant rally in silver.
In addition to all precious metals’ role as a safe haven, silver's popularity is strengthened by its dual quality of being both an industrial metal and a precious metal. It therefore has more cyclical characteristics compared to gold, which is why silver has historically tended to give investors a wilder ride.
Demand and supply economics are also at play. Over the last few years, industrial demand for silver has been boosted by investment in solar energy and rising semi-conductor manufacturing.
At the same time, silver supply has decreased. Over the last two years, the combined silver output from the world’s three largest producers, Mexico, Peru, and Chile, has decreased by 6 per cent, according to the research. Scrap supplies, which have helped to balance supply and demand, have also collapsed.
David Mitchell, Baird & Co. regional director for Asia, says: ‘A confluence of dynamics has come together to produce a very exciting investment prospect. The gold-silver ratio is at a historical high, mining output continues to shrink, scrap silver sales remain extremely depressed, and industrial consumption continues to increase.
He adds: ‘What we have is an extremely rare set of conditions that signal that the price of silver cannot remain where it is for very much longer.’
Russ Mould, investment director at AJ Bell, says: ‘Keen commodity watchers will be well aware of the gold-silver ratio and how cheap silver looks in comparison to its fellow precious metal. But any purchase of silver must be made with wider asset allocation.’
He cautions that silver can be volatile and it offers no yield. ‘It does have more industrial uses than gold so may be more of a play on any economic upswing, whereas gold tends to be a hedge against wider market mayhem.’
Investors who want exposure to raw materials can access a specific commodity through an exchange-traded commodity fund, as few people would want to go to the trouble of storing or insuring raw materials themselves.
Alternatively, they can invest in an exchange-traded fund that tracks the performance of commodities. Inflows into ETF Securities’ silver ETPs, for example, have risen by US$72.7 million since the start of the year.
Aneeka Gupta, associate director and equity & commodities strategist at ETF Securities, says: ‘We have seen silver ETPs attract steady inflows for six consecutive weeks. Initially the inflows were driven by bargain-hunting, with silver underperforming gold. However, last week a strong gain in silver price provided a further catalyst for inflows.’
‘Last week silver prices outperformed gold by a margin of 3.5 per cent and as a consequence we saw the gold/silver ratio fall to 78 from over 82 earlier in the month. The price rally staged by industrial metals last week was owing to concerns around supply amid the ongoing trade tensions and sanctions imposed on Russia lent buoyancy to silver’s upward price momentum.’
He adds that in the World Silver Survey 2018, the Silver Institute envisages a small deficit on the silver market in 2018 after supply failed to keep pace with demand in 2017 and expects its relative price discount to gold to be appealing to investors.
Mould concludes: ‘There is also the possibility that the gold-silver ratio corrects through gold falling rather than silver rising, even if gold seems well underpinned at current price levels.’
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